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Client Update - 19th November 2021

A week on from COP 26, it is hard to decide whether it was a success or otherwise. Certainly, the last minute U-turn on coal due to pressure from China and India was a major disappointment. With this in mind, the world is probably not on track yet to preventing global temperatures rising by more than 1.5 degree centigrade above pre-industrial levels. Despite all the pledges made at COP26 we are likely going to be faced with more frequent extreme weather events and their consequences for businesses and communities. So, pressure will remain on policy makers to do more. We are definitely moving towards a greener economy and that brings with it tremendous investment opportunities.

Optimists would also take heart from the agreements reached on deforestation, plans to reduce methane emissions and commitments to reduce the use of coal. Towards the end of COP26 it was announced that the US and China would work together to reduce greenhouse gas emissions. They need to. Those two countries are the biggest emitters, followed by India and Russia. Indeed, the gloss may be taken off any optimism by the realisation that none of the big four have committed to net zero by 2050 nor have signed the agreement to phase out coal. We can only hope that intermediate targets and co-operation will result in significant declines in emissions in the short term and over the whole period to the second half of the century. As yet though, the intermediate targets are not convincing and more formal commitments to reducing emissions this decade have yet to be agreed on.

Can we really be sure that the current political leadership in Brazil will stop deforestation of the Amazon given the importance of cattle rearing and soya production to the Brazilian economy? Can we be sure that the US will reverse on its commitments should there be another significant political swing at the 2024 election? If we are to focus on one thing, there has not been enough concrete action to reduce coal usage in the biggest consumers of that fuel source.

The private sector certainly cannot do it all and there is far to go. There were consistent calls for clearer policies and regulations, for governments to use taxes and subsidies more effectively and for joined up plans and financing to deliver the infrastructure necessary to rapidly shift to a low carbon economy. The mobilisation of green finance will be important in all of this and there are increasingly larger amounts of capital controlled by asset owners, asset managers and banks that are looking to be invested in a net zero way. As I have written many times, this means huge investment opportunities in climate leaders that are developing the technological solutions to climate change and those companies that are leading the transition to a lower carbon business model. Some of that means exposure to the regime changing technologies – electric vehicles, batteries, renewable energy, hydrogen and so on. But it also means using Environmental, Social and Governance (ESG) techniques to identify companies that are making changes to what they do today to reduce their carbon footprint. A footwear manufacturer said it changed the size of its shoe boxes to optimise the space that shipments would take in containers. Using less space means losing less CO2. Things like that will be (or should be) picked up in an ESG assessment, allowing companies to attract capital from investors focussed on sustainability as well as a profit.

Another thing that was clear from the discussions is that the transition is costly in terms of the amount of investment needed. It could also be costly in that it leads to higher prices for some goods and services, especially if policy actions are taken to shift relative pricing before competitive markets have evolved sufficiently on the renewable or low carbon side. Politics has not even started to address the cost on low income households and countries – electric cars, domestic heating, basic transport and housing needs in emerging countries. There is a huge social cost to be addressed and it needs to be unless we are willing to countenance the much bigger economic and human costs of global temperatures rising 2 degrees Celsius.

Away from tomorrow’s world, markets remain concerned about inflation and rightly so in the wake of the 6.2% year over year gain in US consumer prices for October. In the last almost 40 years, US inflation has only been above 5% on three occasions, including now. After the previous two it fell back sharply, and we are not convinced that our economies have reverted to the institutional structure that sustained higher rates of inflation before the early 1980s. Yet supply problems, base effects and strong demand could be compounded by price effects related to the structural shifts towards low carbon. Needless to say, markets will keep pushing this narrative until central banks start raising interest rates and that looks increasingly like being the key focus in 2022.

I hope you are all keeping well, have a lovely weekend.

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